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Talking heads: Weathering global headwinds

July 15, 2019

Amid a flurry of global challenges – from the US-China trade war to Brexit and major elections across Asia – Investors share their views and navigation strategies on India, Singapore and South Korea.

RASHMI SADHWANI, SENIOR VICE PRESIDENT – HEAD BUSINESS DEVELOPMENT ASIA, UTI INTERNATIONAL (SINGAPORE) PRIVATE LIMITED

What is your investment outlook for the rest of 2019, given several global headwinds?
Given that an imminent slowdown in global growth is driving central banks to soften their monetary policy stance, it is clear that some of the liquidity created will flow into emerging markets/Asia, including India. With several US Federal Reserve (Fed) governors advocating easing, a rangebound US dollar will lead to increased appetite for Asian local currency bonds and equities with the caveat, however, that within the emerging markets bucket, some countries stand to benefit more than others. India definitely stands out, given its low sensitivity or correlation to trade wars and Brexit – 70% of India’s GDP is driven by domestic consumption and 12% by exports. Therefore, unlike the rest of Asia, India remains relatively insulated from global tensions.

Does the US-China trade war give India a growth opportunity to attract manufacturers to settle their bases there?
Already in 2017, India entered the list of top-ten destinations globally for foreign direct investment (FDI). Moreover, India jumped 23 places to rank 77th among 190 countries in the World Bank’s Ease of Doing Business Index in 2019. Thanks to Narendra Modi’s administrative reforms on the ground, India was also named among the top ten countries improving the most in its business reform efforts.But of course, there needs to be a more focused approach from the government to realise the benefits from the US-China standoff in particular. At the moment, since the export baskets of India and China to the US are quite different, India will need to focus and channel its ‘Make in India’ manufacturing campaign towards those sectors and companies which overlap with China’s exports.

What does a second term for Modi’s BJP mean for India’s economy and investment prospects in the country?
Modi’s landslide victory for his second term bodes well for foreign investor sentiment and leadership continuity. What makes this victory special is despite implementing controversial and disruptive reforms already (Goods & Services Tax, demonetisation and enactment of the Bankruptcy & Insolvency Code), he has come back with an even larger majority. According to statistics, this means that the current Modi government will become the first in 20 years to have an absolute majority in both the upper and lower houses of parliament by November 2020.Bills that were previously stalled in parliament now have the highest chances of being passed if tabled once again post-2020. In terms of reforms, land and labour would be the two key items on the agenda. The lack of a majority in the upper house in 2014, for example, made it difficult for the land acquisition bill to be passed and it will now have better chances in Modi’s second term.We expect India’s GDP growth to continue averaging 7% (among the highest in Asia) supported by easier passage of reforms, increased investment, strong domestic consumption and an accommodative central bank. India is set to enter the top three economies in the world by 2030 after China and the USA. Combined with already improved macro fundamentals versus other Asian peers, Indian asset classes remain attractive both from tactical and strategic perspectives.

What are your top three investment/asset allocation concerns for Asia?
• Currencies – whilst a dovish Fed and rangebound dollar underpins the case for yield in Asia, investors exposed to those countries with higher trade and current account deficits (Indonesia, Philippines) may still need to consider FX hedging strategies.
• Household debt – Thailand and South Korea still face high debt levels; hence any policy easing would be more calibrated rather than aggressive.
• Interpreting equity valuations – investors have a tendency to chase markets which simply look ‘cheap’ without studying the prospects for future earnings growth. Whilst the PE multiple of Asian equities fell in 2018, for some countries that was just due to a fall in prices (risk aversion) and investors took this as a buy signal, forgetting that earnings potential differs for each country.

Which sectors are you currently seeking investment opportunities in and how are you positioning your portfolios?
By 2050, India will make up 40% of global middle-class consumption. Therefore we favour private sector banks in India – they are viewed as financiers of domestic demand for cars, houses and so on. Consumer staple and discretionary sectors are poised to benefit from increasing penetration rates. We are also overweight on healthcare because increasing per capita income should increase demand. Finally, cash-rich IT services companies are good portfolio diversifiers, providing a defensive play during market stress.

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